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Crude Oil expected to rise further firmly.

Crude Oil futures

Crude Oil expected to rise further firmly.

The widening gap between demand and supply of crude oil in China will provide firm support to prices in the medium term, according to an analysis by Bank of America- Merrill Lynch (BofAML). Brent crude oil is forecast to trade between $118 and $120 per bbl for 2012 and 2013, BofAML added.

Oil production has risen 84,000 barrels/day per annum in the past 10 years but output has fallen in recent quarters due to unplanned outages and steep decline rates. BofAML estimates that oil demand will grow at an average annual rate of approximately 4.8% from now to 2016, surpassing flat supply growth through the period. China’s oil imports will expand at an annual rate of 6-8% per year or 400 to 500 thousand b/d over the next five years.
The gap will also continue to widen in natural gas, with demand growing yearly by 9.4% but supply only expanding by 5.1%, on average. Similarly, China’s natural gas imports are expected to grow at an average annual rate of 27% or 0.8 bcf/d (7.8 bcm/yr) to 2016, sustaining large purchases of liquid gas in global markets and keeping spot prices well bid in the $15 to $20/MMBtu range for the next two years. Meanwhile, as anticipated by BofAML in early January, US natural gas prices have just broken below $2/MMBtu.
In addition to unplanned outages, mature oilfields are in decline, further limiting production growth.China’s basic problem is lack of big new oilfields, BofAML report said. Twenty years ago, proven oil reserves totaled 16 bn barrels covering 16 years of production but in late 2010, it fell to 14.8 bn barrels enough to cover 10 years of production, the report added. “Despite the growing crude oil gap,China is not short of petroleum products, and the country even added 360 thousand b/d of crude refining capacity in 4Q11 alone. True, part of the rally in oil prices in 2008 was driven by a large unexpected increase in Chinese middle distillate imports. But domestic refining capacity has expanded rapidly since then, also thanks to a more flexible fuel pricing policy. In fact, the government has allowed rapid retail price increases in recent years, including the increase in gasoline and diesel prices of 6-7% in March to help refiners pass through higher crude costs. Looking forward, we believe middle distillates will continue to make up the largest share of oil demand inChina,”  BofAML report said.

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